Senate Budget-Writing Panel Approves Another Tax-Credit Plan to Favor ‘Angel Investors’

February 6, 2013

Investigative Reports

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Angel InvestorOne man’s “angel investor” in South Carolina is another man’s businessman or businesswoman gaining favors from state officials who use tax dollars to pick winners and losers in the private sector.

That game played by elected officials in the Palmetto State has resurfaced this year in the State House with three bills (S. 262 and H. 3095, which are companion bills, and H. 3319). The Senate Finance Committee voted 17-3 Tuesday to pass on to the full Senate a proposal that would allow the state to grant tax credits to certain venture capitalists.

“For small businesses, it’s hard for them to get a loan,” said Sen. Billy O’Dell, R-Abbeville, whose subcommittee he chaired voted favorably for S. 262.

If enacted, the bills would allow an annual state aggregate amount of $5 million or up to $8 million out of state coffers so venture capitalists could invest in high-risk, high-reward businesses in South Carolina. It involves lending by high net-worth individuals to what they regard as promising start-up companies that are too new to land conventional credit.

S. 262, sponsored by Senate Finance Committee Chairman Hugh Leatherman, R-Florence, and co-sponsored by Sen. Nikki Setzler, D-Lexington, resurrects ideas proposed in 2011 but died last session as the clock ran out for bills to pass. As The Nerve reported last year, those provisions at the time included:

  • Granting up to $5 million per year in state tax credits for angel investing, which would reduce annual state collections by the same amount;
  • Qualifying investors could claim up to $100,000 in credits per year;
  • Entitling an angel investor to a nonrefundable state income tax credit of 35 percent of the investment; and
  • Applying 50 percent of the allowed credit to an angel investor’s net tax liability in the year the investment is made; and spreading the other 50 percent over a period not to exceed 10 years.

“If that business is successful, the state gets its money back,” Leatherman said.

Sen. Tom Davis, R-Beaufort, who opposed the bill with GOP Sens. Larry Grooms of Berkeley County and Kevin Bryant of Anderson County, rejected angel investing as a legitimate role for the state.

“Doesn’t the market do that now? Why are we having taxpayers subsidize risk?” Davis asked.

As a protection for the state, supporters pointed to the state recouping its money from successful businesses, and the plan sunsets in 2019, which would require it to be reauthorized.

The House companion bill (H. 3095) to S. 262 is sponsored by Republican Reps. Joe Daning of Berkeley County and Phyllis Henderson of Greenville County.

Those tax benefits would be directed to angel investors who help companies 5 years old or younger with 25 or fewer employees, and which do $2 million in business annually.

However, a second House proposal (H. 3319) increases the state’s annual aggregate cap to $8 million, which would be the amount of income taxes that don’t flow into state coffers. It has the same limit of $100,000 in credits per year for a single investor. The bill copies the other two with half the tax liability in the first year and the other half not to exceed 10 years.

This second House bill, however, boosts a venture capital program known as SC Launch, an affiliate of the South Carolina Research Authority, a state-controlled technology and real estate company. While an angel investor would receive a nonrefundable state tax credit of 35 percent of an investment, it rises to 50 percent for SC Launch portfolio businesses.

Seven GOP House members and one Democrat are co-sponsors of H. 3319. The Republicans are Dwight Loftis and Garry Smith of Greenville County, Dennis Moss and Steve Moss of Cherokee County, Phil Owens of Pickens County, and Bill Sandifer and Bill Whitmire of Oconee County. The Democrat is Robert Williams of Darlington County.

All of the bills require the state Department of Commerce to make an annual report to the Senate Finance and House Ways and Means committees.

“The report must include the name and address of each business, the location of its headquarters, a description of the type of business in which it engages, the amount of capital it has raised, the number of jobs created by the business during the period covered by the report, and the average wages paid by these jobs,” the three bills state.

The Nerve reported last year the void of venture capital programs is not as severe as some believe.

The state, for example, qualified for $18 million under the federal Small Business Jobs Act of 2010.

Virtually all of the money was unused at the time of the story by The Nerve, according to Edwin Lesley, president of the Columbia-based Business Development Corporation of SC, a commercial lender administering the program. Lesley did not respond to a phone call by deadline to see where the program currently stands.

A similar initiative is the S.C. Venture Capital Investment Authority, which oversees $50 million in loans backed by state tax credits.

The third program is SC Launch, funded by $6 million per year in corporate and individual contributions that are good for a 100 percent credit against state taxes. This is the program for which the bill H. 3319 provides an added benefit.

Angel investing supporters said that heads of chambers of commerce testified in favor of the bill because it has been a model of success in other states.

Olson can be reached at (803) 254-4411 or curt@thenerve.org. Follow him on Twitter @thenerve_curt and @olson_curt. Follow The Nerve on Facebook and on Twitter @thenervesc.